The Rationale for Intensity Targets

India’s decision to adopt Greenhouse Gas Emission Intensity (GEI) targets under the Carbon Credit Trading Scheme (CCTS) is a pragmatic and strategic choice shaped by its unique developmental context. Unlike developed nations with high per capita emissions, India is a developing economy with a critical need to prioritize growth, poverty reduction, and infrastructure development. Imposing absolute emission caps from the outset could constrain economic expansion in key sectors like manufacturing, potentially hindering these developmental goals.

• Developmental Stage: With per capita emissions significantly below the global average, India’s policy reflects its right to develop. Intensity targets allow the economy to grow while ensuring that each unit of economic output becomes progressively less carbon-intensive. This approach facilitates the decoupling of economic growth from emission growth over time.
• Administrative Feasibility: Implementing an absolute cap-and-trade system requires a sophisticated Measurement, Reporting, and Verification (MRV) framework capable of tracking emissions across thousands of facilities. As a nascent market, India’s institutional infrastructure is still maturing. Intensity targets provide a more manageable entry point, allowing compliance to be tracked through standardized benchmarks and providing time for the MRV system to develop.
• Market Readiness: A rigid cap-and-trade model could lead to market volatility, non-compliance risks, and resistance from industries lacking affordable abatement technologies. The intensity-based model promotes a gradual transition by rewarding efficiency gains and technological upgrades, thereby encouraging broad participation and buy-in from various sectors.

The Limitations of an Intensity-Based Approach

While strategically sound for the short term, a complete reliance on intensity-based targets is not a sustainable, long-term solution. This approach presents several structural and strategic challenges that could undermine India’s long-term climate goals and global credibility.

• Potential for Overall Emission Increase: A major limitation is that intensity targets do not guarantee a decline in total emissions. In a rapidly expanding economy like India’s, a modest reduction in carbon intensity per unit of GDP can still be offset by a significant increase in overall economic output. This could lead to a net increase in total emissions, contrary to the overarching goal of global decarbonisation. For example, if India’s GDP grows by 7% annually while its carbon intensity decreases by 3%, total emissions could still rise by approximately 4%.
• Gap with International Standards: The CCTS currently requires companies to meet domestically set benchmarks, which may be less stringent than global best practices, particularly in energy-intensive sectors like steel and cement. This could lock in higher emissions and discourage the innovation needed to achieve global competitiveness. Furthermore, the mismatch with international frameworks like the European Union’s Carbon Border Adjustment Mechanism (CBAM), which is based on absolute emission metrics, could pose challenges for Indian exporters.

 A Roadmap for Policy Evolution

For India to maintain its climate leadership and align with global decarbonisation goals, the CCTS must be viewed as a transitional architecture. The scheme should evolve towards a more robust and ambitious framework.

• Phased Transition to Hybrid and Absolute Targets: India should consider a phased approach, beginning with a hybrid model that combines both intensity and absolute targets. Eventually, this should transition to an absolute cap-and-trade system as the economy matures and technological solutions become more widespread.
• Strengthening MRV Infrastructure: The credibility and effectiveness of the CCTS hinge on a robust and transparent MRV system. India should mandate third-party verification using global standards and consider digital, tamper-proof systems, possibly using blockchain technology, to ensure the integrity of emissions data and credit generation.
• Improved Market Design: A well-functioning carbon market requires predictability and trust. Incorporating mechanisms such as price floors and ceilings, rules for credit banking and borrowing, and vintage differentiation can help manage price volatility. A dedicated market oversight body would be crucial for enforcing compliance and preventing manipulation.

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